Latin America Faces Imminent Increase in Sovereign Debt

Mexico is not the only country that will increase its national debt as a result of the COVID-19 pandemic. Moody’s believes that the debt of Latin American countries will increase up to 7 points of the GDP, to reach an average of 54 percent of the GDP in the region. This is the result of harder financial conditions, the increase in payment of interest and the impact that the economic recession will have on countries’ fiscal goals.

According to Moody’s, countries like Mexico, Honduras, Dominican Republic and Bolivia have already seen an increase in the interest of their financing. However, Moody’s says that in this negative scenario, countries must use the help available by international organizations to cover their needs. “The global market is being affected by a larger risk perception, persistent volatility, larger trans-border financing costs and fiscal savings. Countries in the region must depend on alternative sources of financing to cover in an immediate manner their debt needs,” said the report.

Though Mexico’s sovereign rating has already suffered a cut by rating agencies, S&P Global estimates that it will not be the only country to suffer this and that more cuts are bound to happen for other countries since the economic cost of the COVID-19 pandemic is bound to continue causing havoc.

S&P says that currently 25 countries have a negative perspective and thus, a warning that their rating could be cut down. In comparison, only six countries have a positive panorama and 104 have a stable condition. At a global level, S&P estimates that in average, countries will experience a deficit of 6.3 percent of their GDPs.

“In the mid-term, we could see mounting pressure of negative rates, even of the notes that we maintained. If we see that the effects of the pandemic become structural and probably negative long-term implications, that would make the recovery of the fiscal profiles slower,” said the S&P report.

Countries are not the only ones affected by the COVID-19 pandemic. S&P also estimates an increase in corporate debt due to a fall in cash flow, combined with tighter financial conditions and the simultaneous blow of low oil prices.

“It is probable that these factors result in an increase of default payments, with a default rate in non-financial companies in the US that could hike above 10 percent and reach single-digit numbers in Europe in the next 12 months,” said the S&P report.